Living Economics

Next to money, frequent flier miles (FFM) are probably the most sought after medium of exchange.

A good becomes a medium of exchange when it is acceptable to all sellers. With FFM, you can buy almost anything related to travel besides plane tickets (Kansas City Star 6/27/99). Increasingly, other non-travel related goods and services are redeemable with FFM (Business Week 3/6/00)

A medium of exchange must be a good store of value. Unlike before, FFM from most airlines do not expire any more as long as owners fly or do business with one of the airline's partners every three years (Tampa Tribune 11/28/99).

A medium of exchange must be easily earned. These days, you don't even have to fly to earn FFM. Bonus miles can be earned with the purchase of many good and services (Tampa Tribune 11/28/99), or with donations to charities (WSJ 4/15/96). In fact, any purchase with some partner credit cards earns FFM. FFM earned by frequent buying (FBM) are so widespread that they now account for roughly 40 percent of all FFM awarded (Tampa Tribune 11/28/99 and Kansas City Star 6/27/99).

Finally, a medium of exchange must be transferable from owners to non-owners. Indeed, all major programs allow members to transfer awards to family members and all except TWA allow members to transfer awards to anyone they choose (www.webflyer.com).

FFM and FBM are great marketing tools to airlines. They ensure customer loyalty. In their attempt to build up their FFM, customers not only stick to one airline but also to the airline's mileage-paying partners. American Airlines' AAdvantage program is generally rated as the industry leader, partly because it has so many partners that offer members more ways to earn and redeem miles (Tampa Tribune 11/28/99).

FFM can also be used to help build traffic on specific routes by offering bonus miles. Airlines are also encouraging members to use miles for less popular routes by reducing the number of miles needed for such tickets (Business Week 3/6/00).

In addition, FFM and FBM are a reliable source of low-cost revenue. Most airlines charge 25,000 miles for a round-trip domestic ticket. That would mean a revenue from their marketing partners (at 2 cents per mile) of $500, which is higher than discounted fares paid by many travelers. The incremental cost of providing the travel in otherwise empty seats consists of only the small direct expenses on food, extra fuel, and ticketing (Business Week 3/6/00). Even where seats are in high demand, airlines' computer yield management system would set aside only limited frequent flier seats on each flight to ensure that airlines don't give away what they can easily sell. (Tampa Tribune 11/28/99).

The success of the frequent-flier programs depends, of course, on members' mileage illusion. When merchants pass on the costs of the promotion in higher prices, the mileage bonus ends up being a more expensive way to travel than the discount fares (WSJ 4/15/96).